```

[Federal Register Volume 75, Number 127 (Friday, July 2, 2010)]
[Notices]
[Pages 38478-38487]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16206]

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COMMODITY FUTURES TRADING COMMISSION

Orders Finding That the Mid-C Financial Peak Daily Contract and 
Mid-C Financial Off-Peak Daily Contract, Offered for Trading on the 
IntercontinentalExchange, Inc., Do Not Perform a Significant Price 
Discovery Function

AGENCY: Commodity Futures Trading Commission.

ACTION: Final orders.

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SUMMARY: On October 6, 2009, the Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') published for comment in the Federal 
Register \1\ a notice of its intent to undertake a determination 
whether the Mid-C \2\ Financial Peak Daily (``MPD'') contract and Mid-C 
Financial Off-Peak Daily (``MXO'') contract,\3\ which are listed for 
trading on the IntercontinentalExchange, Inc. (``ICE''), an exempt 
commercial market (``ECM'') under sections 2(h)(3)-(5) of the Commodity 
Exchange Act (``CEA'' or the ``Act''), perform a significant price 
discovery function pursuant to section 2(h)(7) of the CEA. The 
Commission undertook this review based upon an initial evaluation of 
information and data provided by ICE as well as other available 
information. The Commission has reviewed the entire record in this 
matter, including all comments received, and has determined to issue 
orders finding that the MPD and MXO contracts do not perform a 
significant price discovery function. Authority for this action is 
found in section 2(h)(7) of the CEA and Commission rule 36.3(c) 
promulgated thereunder.
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    \1\ 74 FR 51261 (October 6, 2009).
    \2\ The acronym ``Mid-C'' stands for Mid-Columbia.
    \3\ The Federal Register notice also requested comment on the 
Mid-C Financial Peak (``MDC'') contract and Mid-C Financial Off-Peak 
(``OMC'') contract; these contracts will be addressed in a separate 
Federal Register release.

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DATES: Effective Date: June 25, 2010.

FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist, 
Division of Market Oversight, Commodity Futures Trading

[[Page 38479]]

Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581. Telephone: (202) 418-5515. E-mail: gprice@cftc.gov; or Susan 
Nathan, Senior Special Counsel, Division of Market Oversight, same 
address. Telephone: (202) 418-5133. E-mail: snathan@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \4\ 
significantly broadened the CFTC's regulatory authority with respect to 
ECMs by creating, in section 2(h)(7) of the CEA, a new regulatory 
category--ECMs on which significant price discovery contracts 
(``SPDCs'') are traded--and treating ECMs in that category as 
registered entities under the CEA.\5\ The legislation authorizes the 
CFTC to designate an agreement, contract or transaction as a SPDC if 
the Commission determines, under criteria established in section 
2(h)(7), that it performs a significant price discovery function. When 
the Commission makes such a determination, the ECM on which the SPDC is 
traded must assume, with respect to that contract, all the 
responsibilities and obligations of a registered entity under the Act 
and Commission regulations, and must comply with nine core principles 
established by new section 2(h)(7)(C).
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    \4\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18, 
2008).
    \5\ 7 U.S.C. 1a(29).
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    On March 16, 2009, the CFTC promulgated final rules implementing 
the provisions of the Reauthorization Act.\6\ As relevant here, rule 
36.3 imposes increased information reporting requirements on ECMs to 
assist the Commission in making prompt assessments whether particular 
ECM contracts may be SPDCs. In addition to filing quarterly reports of 
its contracts, an ECM must notify the Commission promptly concerning 
any contract traded in reliance on the exemption in section 2(h)(3) of 
the CEA that averaged five trades per day or more over the most recent 
calendar quarter, and for which the exchange sells its price 
information regarding the contract to market participants or industry 
publications, or whose daily closing or settlement prices on 95 percent 
or more of the days in the most recent quarter were within 2.5 percent 
of the contemporaneously determined closing, settlement or other daily 
price of another contract.
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    \6\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on 
April 22, 2009.
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    Commission rule 36.3(c)(3) established the procedures by which the 
Commission makes and announces its determination whether a particular 
ECM contract serves a significant price discovery function. Under those 
procedures, the Commission will publish notice in the Federal Register 
that it intends to undertake an evaluation whether the specified 
agreement, contract or transaction performs a significant price 
discovery function and to receive written views, data and arguments 
relevant to its determination from the ECM and other interested 
persons. Upon the close of the comment period, the Commission will 
consider, among other things, all relevant information regarding the 
subject contract and issue an order announcing and explaining its 
determination whether or not the contract is a SPDC. The issuance of an 
affirmative order signals the effectiveness of the Commission's 
regulatory authorities over an ECM with respect to a SPDC; at that time 
such an ECM becomes subject to all provisions of the CEA applicable to 
registered entities.\7\ The issuance of such an order also triggers the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4).\8\
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    \7\ Public Law 110-246 at 13203; Joint Explanatory Statement of 
the Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d 
Sess. 978, 986 (Conference Committee Report). See also 73 FR 75888, 
75894 (Dec. 12, 2008).
    \8\ For an initial SPDC, ECMs have a grace period of 90 calendar 
days from the issuance of a SPDC determination order to submit a 
written demonstration of compliance with the applicable core 
principles. For subsequent SPDCs, ECMs have a grace period of 30 
calendar days to demonstrate core principle compliance.
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II. Notice of Intent To Undertake SPDC Determination

    On October 6, 2009, the Commission published in the Federal 
Register notice of its intent to undertake a determination whether the 
MPD and MXO contracts \9\ perform a significant price discovery 
function and requested comment from interested parties.\10\ Comments 
were received from the Federal Energy Regulatory Commission (``FERC''), 
Financial Institutions Energy Group (``FIEG''), Working Group of 
Commercial Energy Firms (``WGCEF''), Edison Electric Institute 
(``EEI''), ICE, Western Power Trading Forum (``WPTF'') and Public 
Utility Commission of Texas (``PUCT'').\11\ The comment letters from 
FERC \12\ and PUCT did not directly address the issue of whether or not 
the subject contracts are SPDCs. The remaining comment letters raised 
substantive issues with respect to the applicability of section 2(h)(7) 
to the MPD and MXO contracts and generally expressed the opinion that 
the contracts are not SPDCs because they does not meet the material 
price reference or material liquidity criteria for SPDC determination. 
These comments are more extensively discussed below, as applicable.
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    \9\ As noted above, the Federal Register notice also requested 
comment on the Mid-C Financial Peak (``MDC'') contract and Mid-C 
Financial Off-Peak (``OMC'') contract. The MDC and OMC contracts 
will be addressed in a separate Federal Register release.
    \10\ The Commission's Part 36 rules establish, among other 
things, procedures by which the Commission makes and announces its 
determination whether a specific ECM contract serves a significant 
price discovery function. Under those procedures, the Commission 
publishes a notice in the Federal Register that it intends to 
undertake a determination whether a specified agreement, contract or 
transaction performs a significant price discovery function and to 
receive written data, views and arguments relevant to its 
determination from the ECM and other interested persons.
    \11\ FERC is an independent federal regulatory agency that, 
among other things, regulates the interstate transmission of natural 
gas, oil and electricity. FIEG describes itself as an association of 
investment and commercial banks who are active participants in 
various sectors of the natural gas markets, ``including acting as 
marketers, lenders, underwriters of debt and equity securities, and 
proprietary investors.'' WGCEF describes itself as ``a diverse group 
of commercial firms in the domestic energy industry whose primary 
business activity is the physical delivery of one or more energy 
commodities to customers, including industrial, commercial and 
residential consumers'' and whose membership consists of ``energy 
producers, marketers and utilities.'' EEI is the ``association of 
shareholder-owned electric companies, international affiliates and 
industry associates worldwide.'' ICE is an ECM, as noted above. WPTF 
describes itself as a ``broad-based membership organization 
dedicated to encouraging competition in the Western power markets * 
* * WTPF strives to reduce the long-run cost of electricity to 
consumers throughout the region while maintaining the current high 
level of system reliability.'' PUCT is the independent organization 
that oversees the Electric Reliability Council of Texas (``ERCOT'') 
to ``ensure nondiscriminatory access to the transmission and 
distribution systems, to ensure the reliability and adequacy of the 
regional electrical network, and to perform other essential market 
functions.'' The comment letters are available on the Commission's 
Web site: http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-011.html.
    \12\ FERC expressed the opinion that a determination by the 
Commission that either of the subject contracts performs a 
significant price discovery function ``would not appear to conflict 
with FERC's exclusive jurisdiction under the Federal Power Act (FPA) 
over the transmission or sale for resale of electric energy in 
interstate commerce or with its other regulatory responsibilities 
under the FPA'' and further that ``FERC staff will monitor proposed 
SPDC determinations and advise the CFTC of any potential conflicts 
with FERC's exclusive jurisdiction over RTOs, [(regional 
transmission organizations)], ISOs [(independent system operators)] 
or other jurisdictional entities.''

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[[Page 38480]]

III. Section 2(h)(7) of the CEA

    The Commission is directed by section 2(h)(7) of the CEA to 
consider the following criteria in determining a contract's significant 
price discovery function:
     Price Linkage--the extent to which the agreement, contract 
or transaction uses or otherwise relies on a daily or final settlement 
price, or other major price parameter, of a contract or contracts 
listed for trading on or subject to the rules of a designated contract 
market (``DCM'') or derivatives transaction execution facility 
(``DTEF''), or a SPDC traded on an electronic trading facility, to 
value a position, transfer or convert a position, cash or financially 
settle a position, or close out a position.
     Arbitrage--the extent to which the price for the 
agreement, contract or transaction is sufficiently related to the price 
of a contract or contracts listed for trading on or subject to the 
rules of a DCM or DTEF, or a SPDC traded on or subject to the rules of 
an electronic trading facility, so as to permit market participants to 
effectively arbitrage between the markets by simultaneously maintaining 
positions or executing trades in the contracts on a frequent and 
recurring basis.
     Material price reference--the extent to which, on a 
frequent and recurring basis, bids, offers or transactions in a 
commodity are directly based on, or are determined by referencing or 
consulting, the prices generated by agreements, contracts or 
transactions being traded or executed on the electronic trading 
facility.
     Material liquidity--the extent to which the volume of 
agreements, contracts or transactions in a commodity being traded on 
the electronic trading facility is sufficient to have a material effect 
on other agreements, contracts or transactions listed for trading on or 
subject to the rules of a DCM, DTEF or electronic trading facility 
operating in reliance on the exemption in section 2(h)(3).
    Not all criteria must be present to support a determination that a 
particular contract performs a significant price discovery function, 
and one or more criteria may be inapplicable to a particular 
contract.\13\ Moreover, the statutory language neither prioritizes the 
criteria nor specifies the degree to which a SPDC must conform to the 
various criteria. In Guidance issued in connection with the Part 36 
rules governing ECMs with SPDCs, the Commission observed that these 
criteria do not lend themselves to a mechanical checklist or formulaic 
analysis. Accordingly, the Commission has indicated that in making its 
determinations it will consider the circumstances under which the 
presence of a particular criterion, or combination of criteria, would 
be sufficient to support a SPDC determination.\14\ For example, for 
contracts that are linked to other contracts or that may be arbitraged 
with other contracts, the Commission will consider whether the price of 
the potential SPDC moves in such harmony with the other contract that 
the two markets essentially become interchangeable. This co-movement of 
prices would be an indication that activity in the contract had reached 
a level sufficient for the contract to perform a significant price 
discovery function. In evaluating a contract's price discovery role as 
a price reference, the Commission the extent to which, on a frequent 
and recurring basis, bids, offers or transactions are directly based 
on, or are determined by referencing, the prices established for the 
contract.
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    \13\ In its October 6, 2009, Federal Register release, the 
Commission identified material price reference and material 
liquidity as the possible criteria for SPDC determination of the MPD 
and MXO contracts. Arbitrage and price linkage were not identified 
as possible criteria. As a result, arbitrage and price linkage will 
not be discussed further in this document and the associated Orders.
    \14\ 17 CFR 36, Appendix A.
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IV. Findings and Conclusions

    The Commission's findings and conclusions with respect to the MPD 
and MXO contracts are discussed separately below:

a. The Mid-C Financial Peak Daily (MPD) Contract and the SPDC Indicia

    The MPD contract is cash settled based on the peak, day-ahead price 
index for the specified day, as published by ICE in its ``ICE Day Ahead 
Power Price Report,'' which is available on the ECM's Web site. The 
daily peak-hour electricity price index is a volume-weighted average of 
qualifying, day-ahead, peak-hour power transactions at the Mid-Columbia 
hub that are traded on the ICE platform from 6 a.m. to 11 a.m. CST on 
the publication date. The ICE transactions on which the price index is 
based specify the physical delivery of power. The size of the MPD 
contract is 400 megawatt hours (``MWh''), and the MPD contract is 
listed for 38 consecutive days.
    As the Columbia River flows through Washington State, it encounters 
two federal and nine privately-owned hydroelectric dams generating a 
total of close to 20,000 MW of power in the Northwest.\15\ With another 
three dams in British Columbia, Canada, and many more on its various 
tributaries, the Columbia River is the largest power-producing river in 
North America. A major goal of the participants in the Mid-C 
electricity market is to maximize the Columbia River's potential, along 
with protecting and enhancing the non-power uses of the river. The 
reliability of the electricity grid in the Northwest is coordinated by 
the Northwest PowerPool (``NWPP''), which is a voluntary organization 
comprised of major generating utilities serving the Northwestern United 
States, as well as British Columbia and Alberta, Canada.
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    \15\ http://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
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    One stretch of the Columbia River between the Grand Coulee Dam and 
Priests Rapids Dam is governed by the Mid-Columbia Hourly Coordination 
Agreement (``MCHCA''). The MCHCA covers seven dams \16\ and nearly 
13,000 MW of generation. Specifically, the agreement defines how the 
Chelan, Douglas and Grant PUDs coordinate operations with the 
Bonneville Power Administration to maximize power generation while 
reducing fluctuations in the river's flow. A number of other utilities 
that buy power from the PUDs have also signed onto the agreement. This 
agreement was signed into effect in 1972 and renewed for 20 years in 
1997.\17\
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    \16\ The federal dams are Grand Coulee and Chief Joseph. The 
remaining dams are Wells (operated by the Douglas PUD), Rocky Reach 
and Rock Island (operated by the Chelan PUD), and Wanapum and Priest 
Rapids (operated by the Grant PUD). The term ``PUD'' stands for 
publically-owned utility, which provides essential services within a 
specified area.
    \17\ http://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
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    In general, electricity is bought and sold in an auction setting on 
an hourly basis at various points along the electrical grid. The price 
of electricity at a particular point on the grid is called the 
locational marginal price (``LMP''), which includes the costs of 
producing the electricity, as well as congestion and line losses. Thus, 
an LMP reflects generation costs as well as the actual cost of 
supplying and delivering electricity to a specific point on the grid.
    Electricity is traded in a day-ahead market as well as a real-time 
market. Typically, the bulk of energy transactions occur in the day-
ahead market. The day-ahead market establishes prices for electricity 
that is to be delivered during the specified hour on the following day. 
Day-ahead prices are determined based on generation and energy 
transaction quotes offered in advance. Because day-

[[Page 38481]]

ahead quotes for power are based on estimates of supply and demand, 
electricity needs usually are not perfectly satisfied in the day-ahead 
market. In this regard, on the day the electricity is transmitted and 
used, auction participants typically realize that they bought or sold 
too much power or too little power. A real-time auction is operated to 
alleviate this problem by servicing as a balancing mechanism. 
Specifically, electricity traders use the real-time market to sell 
excess electricity and buy additional power to meet demand. Only a 
relatively small amount of electricity is traded in the real-time 
market compared with the day-ahead market.
1. Material Price Reference Criterion
    The Commission's October 6, 2009, Federal Register notice 
identified material price reference and material liquidity as the 
potential basis for a SPDC determination with respect to the MPD 
contract. The Commission considered the fact that ICE sells its price 
data to market participants in a number of different packages which 
vary in terms of the hubs covered, time periods, and whether the data 
are daily only or historical. For example, ICE offers the ``West Power 
of Day'' package with access to all price data or just current prices 
plus a selected number of months (i.e., 12, 24, 36 or 48 months) of 
historical data. This package includes price data for the MPD contract.
    The Commission also noted that its October 2007 Report on the 
Oversight of Trading on Regulated Futures Exchanges and Exempt 
Commercial Markets (``ECM Study'') found that in general, market 
participants view ICE as a price discovery market for certain 
electricity contracts. The study did not specify which markets 
performed this function; nevertheless, the Commission determined that 
the MPD contract, while not mentioned by name in the ECM Study, might 
warrant further review.
    The Commission explains in its Guidance to the Part 36 rules that 
in evaluating a contract under the material price reference criterion, 
it will rely on one of two sources of evidence--direct or indirect--to 
determine that the price of a contract was being used as a material 
price reference and therefore, serving a significant price discovery 
function.\18\ With respect to direct evidence, the Commission will 
consider the extent to which, on a frequent and recurring basis, cash 
market bids, offers or transactions are directly based on or quoted at 
a differential to, the prices generated on the ECM in question. Direct 
evidence may be established when cash market participants are quoting 
bid or offer prices or entering into transactions at prices that are 
set either explicitly or implicitly at a differential to prices 
established for the contract in question. Cash market prices are set 
explicitly at a differential to the section 2(h)(3) contract when, for 
instance, they are quoted in dollars and cents above or below the 
reference contract's price. Cash market prices are set implicitly at a 
differential to a section 2(h)(3) contract when, for instance, they are 
arrived at after adding to, or subtracting from the section 2(h)(3) 
contract, but then quoted or reported at a flat price. With respect to 
indirect evidence, the Commission will consider the extent to which the 
price of the contract in question is being routinely disseminated in 
widely distributed industry publications--or offered by the ECM itself 
for some form of remuneration--and consulted on a frequent and 
recurring basis by industry participants in pricing cash market 
transactions.
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    \18\ 17 CFR 36, Appendix A.
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    The Mid-C power market is a major pricing center for electricity on 
the West Coast. Traders, including producers, keep abreast of the 
electricity prices in the Mid-C power market when conducting cash 
deals. However, ICE's Mid-C Financial Peak (``MDC'') contract, which is 
a monthly contract, is used more widely as a source of pricing 
information for electricity than the daily, peak-hour contract (i.e., 
the MPD contract). Specifically, the MDC contract prices power at the 
Mid-C trading point based on the simple average of the daily peak-hour 
prices over the entire month, as reported by ICE. Moreover, the MDC 
contract is listed for up to 86 calendar months. Thus, market 
participants can use the MDC contract to lock-in electricity prices far 
into the future. In contrast, the MPD contract is listed for a much 
shorter length of time--up to 38 days in the future. With such a 
limited timeframe, the forward pricing capability of the MPD contract 
is much more constrained than that of the MDC contract. Traders use 
monthly power contracts like the MDC contract to price electricity 
commitments in the future, where such commitments are based on long 
range forecasts of power supply and demand. As actual generation and 
usage nears, market participants have a better understanding of actual 
power supply and needs. As a result, traders can modify previously-
established hedges with the daily power contracts, like the MPD 
contract.
    The Commission explained in its Guidance that a contract meeting 
the material price reference criterion would routinely be consulted by 
industry participants in pricing cash market transactions. Although the 
Mid-C is a major trading center for electricity and, as noted, ICE 
sells price information for the MPD contract, the MPD contract is not 
consulted in this manner and does not satisfy the material price 
reference criterion. Thus, the MPD contract does not satisfy the direct 
price reference test for existence of material price reference. 
Furthermore, the Commission notes that publication of the MPD 
contract's prices is not indirect evidence of material price reference. 
The MPD contract's prices are published with those of numerous other 
contracts, including ICE's monthly electricity contracts, which are of 
more interest to market participants. In these circumstances, the 
Commission has concluded that traders likely do not specifically 
purchase ICE data packages for the MPD contract's prices and do not 
consult such prices on a frequent and recurring basis in pricing cash 
market transactions.
    i. Federal Register Comments:
    WGCEF, WPTF, EEI and ICE stated that no other contract directly 
references or settles to the MPD contract's price. Moreover, the 
commenters argued that the underlying cash price series against which 
the MPD contract is settled (in this case, the peak Mid-C electricity 
price on a particular day, which is derived from cash market 
transactions) is the authentic reference price and not the ICE contract 
itself. Commission staff believes that this interpretation of price 
reference is too narrow and believes that a cash-settled derivatives 
contract could meet the price reference criterion if market 
participants ``consult on a frequent and recurring basis'' the 
derivatives contract when pricing forward, fixed-price commitments or 
other cash-settled derivatives that seek to ``lock in'' a fixed price 
for some future point in time to hedge against adverse price movements. 
As noted above, while the Mid-C is a major power market, traders do not 
consider the daily peak-hour Mid-C price to be as important as the 
electricity price associated with the monthly contract.
    In addition, WGCEF stated that the publication of price data for 
the MPD contract price is weak justification for material price 
reference. This commenter argued that market participants generally do 
not purchase ICE data sets for one contract's prices, such as those for 
the MPD contract. Instead, traders are interested in the settlement 
prices, so the fact that ICE sells the MPD prices as part of a broad 
package is not conclusive evidence that market participants are buying 
the ICE

[[Page 38482]]

data sets because they find the MPD prices have substantial value to 
them. As noted above, the Commission notes that publication of the MPD 
contract's prices is not indirect evidence of routine dissemination. 
The MPD contract's prices are published with those of numerous other 
contracts, which are of more interest to market participants. Due to 
the lack of importance of daily power contracts relative to monthly 
contracts, the Commission has concluded that traders likely do not 
specifically purchase the ICE data packages for the MPD contract's 
prices and do not consult such prices on a frequent and recurring basis 
in pricing cash market transactions.
    Lastly, EEI criticized that the ECM Study did not specifically 
identify the MPD contract as a contract that is referred to by market 
participants on a frequent and recurring basis. In response, the 
Commission notes that it cited the ECM Study's general finding that 
some ICE electricity contracts appear to be regarded as price discovery 
markets merely as indication that an investigation of certain ICE 
contracts may be warranted. The ECM Study was not intended to serve as 
the sole basis for determining whether or not a particular contract 
meets the material price reference criterion.
ii. Conclusion Regarding Material Price Reference
    Based on the above, the Commission finds that the ICE MPD contract 
does not meet the material price reference criterion because cash 
market transactions are not priced either explicitly or implicitly on a 
frequent and recurring basis at a differential to the MPD contract's 
price (direct evidence). Moreover, while the MPD contract's price data 
is sold to market participants, those individuals likely do not 
purchase the ICE data packages specifically for the MPD contract's 
prices and do not consult such prices on a frequent and recurring basis 
in pricing cash market transactions (indirect evidence).
2. Material Liquidity Criterion
    As noted above, in its October 6, 2009, Federal Register notice, 
the Commission identified material price reference and material 
liquidity as potential criteria for SPDC determination of the MPD 
contract. To assess whether a contract meets the material liquidity 
criterion, the Commission first examines trading activity as a general 
measurement of the contract's size and potential importance. If the 
Commission finds that the contract in question meets a threshold of 
trading activity that would render it of potential importance, the 
Commission will then perform a statistical analysis to measure the 
effect that changes to the subject contract's prices potentially may 
have on prices for other contracts listed on an ECM or a DCM.
    The total number of transactions executed on ICE's electronic 
platform in the MPD contract was 1,294 in the second quarter of 2009, 
resulting in a daily average of 20.2 trades. During the same period, 
the MPD contract had a total trading volume of 18,862 contracts and an 
average daily trading volume of 294.7 contracts. Moreover, open 
interest as of June 30, 2009, was 826 contracts, which included trades 
executed on ICE's electronic trading platform, as well as trades 
executed off of ICE's electronic trading platform and then brought to 
ICE for clearing. In this regard, ICE does not differentiate between 
open interest created by a transaction executed on its trading platform 
and that created by a transaction executed off its trading 
platform.\19\
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    \19\ 74 FR 51261 (October 6, 2009).
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    In a subsequent filing dated March 24, 2010, ICE reported that 
total trading volume in the fourth quarter of 2009 was 19,574 contracts 
(or 301 contracts on a daily basis). In terms of number of 
transactions, 1,108 trades occurred in the fourth quarter of 2009 (17 
trades per day). As of December 31, 2009, open interest in the MPD 
contract was 550 contracts, which included trades executed on ICE's 
electronic trading platform, as well as trades executed off of ICE's 
electronic trading platform and then brought to ICE for clearing.
    The number of trades per day remained relatively low between the 
second and fourth quarters of 2009 and averaged only slightly more than 
the reporting level of five trades per day. Moreover, trading activity 
in the MPD contract, as characterized by total quarterly volume, 
indicates that the MPD contract experiences trading activity that is 
similar to that of minor futures markets.\20\ Thus, the MPD contract 
does not meet a threshold of trading activity that would render it of 
potential importance and no additional statistical analysis is 
warranted.\21\
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    \20\ Staff has advised the Commission that in its experience, a 
thinly-traded contract is, generally, one that has a quarterly 
trading volume of 100,000 contracts or less. In this regard, in the 
third quarter of 2009, physical commodity futures contracts with 
trading volume of 100,000 contracts or fewer constituted less than 
one percent of total trading volume of all physical commodity 
futures contracts.
    \21\ In establishing guidance to illustrate how it will evaluate 
the various criteria, or combinations of criteria, when determining 
whether a contract is a SPDC, the Commission made clear that 
``material liquidity itself would not be sufficient to make a 
determination that a contract is a [SPDC],* * * but combined with 
other factors it can serve as a guidepost indicating which contracts 
are functioning as [SPDCs].'' [17 CFR 36, Appendix A]. For the 
reasons discussed above, the Commission has found that the MPD 
contract does not meet the material price reference criterion. In 
light of this finding and the Commission's Guidance cited above, 
there is no need to evaluate further the material liquidity criteria 
since the Commission believes it is not useful as the sole basis for 
a SPDC determination.
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i. Federal Register Comments
    ICE and WGCEF stated that the MPD contract lacks a sufficient 
number of trades to meet the material liquidity criterion. These two 
commenters, along with WPTF, FEIG and EEI argued that the MPD contract 
cannot have a material effect on other contracts, such as those listed 
for trading by the New York Mercantile Exchange (``NYMEX''), a DCM. The 
commenters pointed out that it is not possible for the MPD contract to 
affect a DCM contract because price linkage and the potential for 
arbitrage do not exist. The DCM contracts do not cash settle to the MPD 
contract's price. Instead, the DCM contracts and the MPD contract are 
both cash settled based on physical transactions, which neither the ECM 
or the DCM contracts can influence.
    WGCEF and ICE noted that the Commission's Guidance had posited 
concepts of liquidity that generally assumed a fairly constant stream 
of prices throughout the trading day and noted that the relatively low 
number of trades per day in the MPD contract did not meet this standard 
of liquidity. The Commission observes that a continuous stream of 
prices would indeed be an indication of liquidity for certain markets 
but the Guidance also notes that ``quantifying the levels of immediacy 
and price concession that would define material liquidity may differ 
from one market or commodity to another.'' \22\
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    \22\ Guidance, supra.
---------------------------------------------------------------------------

    ICE opined that the Commission ``seems to have adopted a five trade 
per day test for material liquidity.'' To the contrary, the Commission 
adopted a five trades-per-day threshold as a reporting requirement to 
enable it to ``independently be aware of ECM contracts that may develop 
into SPDCs'' \23\ rather than solely relying upon an ECM on its own to 
identify any such potential SPDCs to the Commission. Thus, any contract 
that meets this threshold may be subject to scrutiny as a potential 
SPDC; however, the contract will not be found to be a

[[Page 38483]]

SPDC merely because it met the reporting threshold.
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    \23\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

    ICE proposed that the statistics provided by ICE were 
misinterpreted and misapplied by the Commission. In particular, ICE 
stated that the volume figures used in the Commission's analysis (cited 
above) ``include trades made in all months'' as well as in strips of 
contract months. ICE suggested that a more appropriate method of 
determining liquidity is to examine the activity in a single traded 
month of a given contract.'' \24\ It is the Commission's opinion that 
liquidity, as it pertains to the MPD contract, is typically a function 
of trading activity in particular lead days and, given sufficient 
liquidity in such days, the ICE MPD contract itself would be considered 
liquid. In any event, in light of the fact that the Commission has 
found that the MPD contract does not meet the material price reference 
criterion, according to the Commission's Guidance, it would be 
unnecessary to evaluate whether the MPD contract meets the material 
liquidity criterion since it cannot be used alone for SPDC 
determination.
---------------------------------------------------------------------------

    \24\ In addition, ICE stated that the trades-per-day statistics 
that it provided to the Commission in its quarterly filing and which 
were cited in the Commission's October 6, 2009, Federal Register 
notice includes 2(h)(1) transactions, which were not completed on 
the electronic trading platform and should not be considered in the 
SPDC determination process. The Commission staff asked ICE to review 
the data it sent in its quarterly filings; ICE confirmed that the 
volume data it provided and which the Commission cited includes only 
transaction data executed on ICE's electronic trading platform. As 
noted above, supplemental data supplied by ICE confirmed that block 
trades are in addition to the trades that were conducted on the 
electronic platform; block trades comprise about 28 percent (fourth 
quarter of 2009) of all transactions in the MPD contract. Commission 
acknowledges that the open interest information it provided in its 
October 6, 2009, Federal Register notice includes transactions made 
off the ICE platform. However, once open interest is created, there 
is no way for ICE to differentiate between ``on-exchange'' versus 
``off-exchange'' created positions, and all such positions are 
fungible with one another and may be offset in any way agreeable to 
the position holder regardless of how the position was initially 
created.
---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity
    For the reasons discussed above, the Commission finds that the MPD 
contract does not meet the material liquidity criterion.
3. Overall Conclusion Regarding the MPD Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the ICE MPD 
contract does not perform a significant price discovery function under 
the criteria established in section 2(h)(7) of the CEA. Specifically, 
the Commission has determined that the MPD contract does not meet the 
material price reference or material liquidity criteria at this time. 
Accordingly, the Commission is issuing the attached Order declaring 
that the MPD contract is not a SPDC.
    Issuance of this Order indicates that the Commission does not at 
this time regard ICE as a registered entity in connection with its MPD 
contract.\25\ Accordingly, with respect to its MPD contract, ICE is not 
required to comply with the obligations, requirements and timetables 
prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However, 
ICE must continue to comply with the applicable reporting requirements 
for ECMs.
---------------------------------------------------------------------------

    \25\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

b. The Mid-C Financial Off-Peak Daily (MXO) Contract and the SPDC 
Indicia

    The MXO contract is cash settled based on the off-peak, day-ahead 
price index for the specified day, as published by ICE in its ``ICE Day 
Ahead Power Price Report,'' which is available on the ECM's website. 
The daily, off-peak hour electricity price index is a volume-weighted 
average of qualifying, day-ahead, off-peak hour power transactions at 
the Mid-Columbia hub that are traded on the ICE platform from 6 a.m. to 
11a.m. CST on the publication date. The ICE transactions on which the 
price index is based specify the physical delivery of power. The size 
of the MXO contract is 25 MWh, and the MXO contract is listed for 70 
consecutive days.
    As the Columbia River flows through Washington State, it encounters 
two federal and nine privately-owned hydroelectric dams generating 
close to 20,000 MW of power for the Northwest.\26\ With another three 
dams in British Columbia, Canada, and many more on its various 
tributaries, the Columbia River is the largest power-producing river in 
North America. A major goal of the participants in the Mid-C 
electricity market is to maximize the Columbia River's potential, along 
with protecting and enhancing the non-power uses of the river. The 
reliability of the electricity grid in the Northwest is coordinated by 
the NWPP.
---------------------------------------------------------------------------

    \26\ http://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
---------------------------------------------------------------------------

    One stretch of the Columbia River between the Grand Coulee Dam and 
Priests Rapids Dam is governed by the MCHCA. The MCHCA covers seven 
dams \27\ and nearly 13,000 MW of generation. Specifically, the 
agreement defines how the Chelan, Douglas and Grant PUDs coordinate 
operations with the Bonneville Power Administration to maximize power 
generation while reducing fluctuations in the river's flow. A number of 
other utilities that buy power from the PUDs have also signed onto the 
agreement. This agreement was signed into effect on 1972 and renewed 
for 20 years in 1997.\28\
---------------------------------------------------------------------------

    \27\ The federal dams are Grand Coulee and Chief Joseph. The 
remaining dams are Wells (operated by the Douglas PUD), Rocky Reach 
and Rock Island (operated by the Chelan PUD), and Wanapum and Priest 
Rapids (operated the Grant PUD).
    \28\ http://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
---------------------------------------------------------------------------

    In general, electricity is bought and sold in an auction setting on 
an hourly basis at various point along the electrical grid. The price 
of electricity at a particular point on the grid is called the LMP, 
which includes the cost of producing the electricity, as well as 
congestion and line losses. Thus, and LMP reflects generation costs as 
well as the actual cost of supplying and delivering electricity to a 
specific point on the grid.
    Electricity is traded in a day-ahead market as well as a real-time 
market. Typically, the bulk of the energy transactions occur in the 
day-ahead market. The day-ahead market establishes prices for 
electricity that is to be delivered during the specified hour on the 
following day. Day-ahead prices are determined based on generation and 
energy transaction quotes offered in advance. Because day-ahead price 
quotes are based on estimates of supply and demand, electricity needs 
usually are not perfectly satisfied in the day-ahead market. On the day 
electricity is generated and used, auction participants usually realize 
that they bought or sold either too much or too little power. A real-
time auction is operated in the Mid-C market to alleviate this problem. 
In this regard, electricity traders use the real-time market to sell 
excess electricity and buy additional power to meet demand. Only a 
relatively small amount of electricity is traded in the real-time 
market compared with the day-ahead market.
1. Material Price Reference Criterion
    The Commission's October 6, 2009, Federal Register notice 
identified material price reference and material liquidity as the 
potential basis for a SPDC determination with respect to the MXO 
contract. The Commission considered the fact that ICE sells its price 
data to market participants in a number of different packages which 
vary in terms of the hubs covered, time periods, and whether the data 
are daily

[[Page 38484]]

only or historical. For example, ICE offers the ``West Power of Day'' 
package with access to all price data or just current prices plus a 
selected number of months (i.e., 12, 24, 36 or 48 months) of historical 
data. This package includes price data for the MXO contract.
    The Commission also noted that its October 2007 ECM Study found 
that, in general, market participants view ICE as a price discovery 
market for certain electricity contracts. The study did not specify 
which markets performed this function; nevertheless, the Commission 
determined that the MXO contract, while not mentioned by name in the 
ECM Study, might warrant further analysis.
    The Commission has explained in Guidance that it will rely on one 
of two sources of evidence--direct or indirect--to determine that the 
price of a contract is being used as a material price reference and 
therefore, serving a significant price discovery function.\29\ With 
respect to direct evidence, the Commission will consider the extent to 
which, on a frequent and recurring basis, cash market bids, offers or 
transactions are directly based on or quoted at a differential to, the 
prices generated on the ECM in question. Direct evidence may be 
established when cash market participants are quoting bid or offer 
prices or entering into transactions at prices that are set either 
explicitly or implicitly at a differential to prices established for 
the contract in question. Cash market prices are set explicitly at a 
differential to the section 2(h)(3) contract when, for instance, they 
are quoted in dollars and cents above or below the reference contract's 
price. Cash market prices are set implicitly at a differential to a 
section 2(h)(3) contract when, for instance, they are arrived at after 
adding to, or subtracting from the section 2(h)(3) contract, but then 
quoted or reported at a flat price. With respect to indirect evidence, 
the Commission will consider the extent to which the price of the 
contract in question is being routinely disseminated in widely 
distributed industry publications--or offered by the ECM itself for 
some form of remuneration--and consulted on a frequent and recurring 
basis by industry participants in pricing cash market transactions.
---------------------------------------------------------------------------

    \29\ 17 CFR 36, Appendix A.
---------------------------------------------------------------------------

    The Mid-C power market is a major pricing center for electricity on 
the West Coast. Traders, including producers, keep abreast of the 
electricity prices in the Mid-C power market when conducting cash 
deals. However, ICE's Mid-C Financial Off-Peak (``OMC'') contract, 
which is a monthly contract, is used more widely as a source of pricing 
information for electricity in that market than the daily off-peak hour 
contract (i.e., the MXO contract). In this regard, OMC contract prices 
power at the Mid-C trading point based on the simple average of the 
daily off-peak hour prices over the entire month, as reported by ICE. 
Moreover, the OMC contract is listed for up to 86 calendar months. 
Market participants can use the OMC contract to lock-in off-peak 
electricity prices far into the future. In contrast, the MXO contract 
is listed for a much shorter length of time--up to 70 days in the 
future. With such a limited timeframe, the forward pricing capability 
of the MXO contract is constrained relative to that of the OMC 
contract. Traders likely use monthly power contracts like the OMC 
contract to price electricity commitments in the future. Such 
commitments are based on long range forecasts of power supply and 
demand. As the time of generation and consumption nears, market 
participants have a better understanding of actual power supply and 
needs. As a result, traders can modify previously-established hedges 
with the daily power contracts, like the MXO contract.
    The Commission explained in its Guidance that a contract meeting 
the material price reference criterion would routinely be consulted by 
industry participants in pricing cash market transactions. Although the 
Mid-C is a major trading center for electricity and, as noted, ICE 
sells price information for the MXO contract, the Commission found upon 
further evaluation that the MXO contract is not routinely consulted by 
industry participants in pricing cash market transactions. Furthermore, 
the Commission notes that publication of the MXO contract's prices is 
not indirect evidence of material price reference. The MXO contract's 
prices are published with those of numerous other contracts, including 
ICE's OMC contract, which are of more interest to market participants. 
Thus, the Commission has concluded that traders likely do not 
specifically purchase ICE data packages for the MXO contract's prices 
and do not consult such prices on a frequent and recurring basis in 
pricing cash market transactions.
i. Federal Register Comments
    WGCEF, WPTF, EEI and ICE stated that no other contract directly 
references or settles to the MXO contract's price. Moreover, the 
commenters argued that the underlying cash price series against which 
the MXO contract is settled (in this case, the off-peak Mid-C 
electricity price on a particular day, which is derived from cash 
market transactions) is the authentic reference price and not the ICE 
contract itself. Commission staff believes that this interpretation of 
price reference is too limiting and believes that a cash-settled 
derivatives contract could meet the price reference criterion if market 
participants ``consult on a frequent and recurring basis'' the 
derivatives contract when pricing forward, fixed-price commitments or 
other cash-settled derivatives that seek to ``lock in'' a fixed price 
for some future point in time to hedge against adverse price movements. 
As noted above, while the Mid-C is a major power market, traders do not 
consider the daily off-peak hour Mid-C price to be as important as the 
electricity price associated with the average monthly off-peak price.
    In addition, WGCEF stated that the publication of price data for 
the MXO contract price reference is weak justification for material 
price reference. This commenter argued that market participants 
generally do not purchase ICE data sets for one contract's prices, such 
as those for the MXO contract. Instead, traders are interested in the 
settlement prices, so the fact that ICE sells the MXO prices as part of 
a broad package is not conclusive evidence that market participants are 
buying the ICE data sets because they find the MXO prices have 
substantial value to them. As mentioned above, the Commission notes 
that publication of the MXO contract's prices is not indirect evidence 
of routine dissemination. The MXO contract's prices are published with 
those of numerous other contracts, which are of more interest to market 
participants. Due to the lack of importance of daily power contracts 
relative to monthly power contracts, the Commission has concluded that 
traders likely do not specifically purchase the ICE data packages for 
the MXO contract's prices and do not consult such prices on a frequent 
and recurring basis in pricing cash market transactions.
    Lastly, EEI observed that the ECM Study did not specifically 
identify the MXO contract as a contract that is referred to by market 
participants on a frequent and recurring basis. In response, the 
Commission notes that it cited the ECM Study's general finding that 
some ICE electricity contracts appear to be regarded as price discovery 
markets merely as indication that an investigation of certain ICE 
contracts may be warranted. The ECM Study was not intended to serve as 
the sole basis for determining whether or not a particular contract 
meets the material price reference criterion.

[[Page 38485]]

    ii. Conclusion Regarding Material Price Reference:
    Based on the above, the Commission finds that the ICE MXO contract 
does not meet the material price reference criterion because cash 
market transactions are not priced either explicitly or implicitly on a 
frequent and recurring basis at a differential to the MXO contract's 
price (direct evidence). Moreover, while the MXO contract's price data 
is sold to market participants, those individuals likely do not 
specifically purchase the ICE data packages for the MXO contract's 
prices and do not consult such prices on a frequent and recurring basis 
in pricing cash market transactions (indirect evidence).
2. Material Liquidity Criterion
    As noted above, in its October 6, 2009, Federal Register notice, 
the Commission identified material price reference and material 
liquidity as potential criteria for SPDC determination of the MXO 
contract. To assess whether a contract meets the material liquidity 
criterion, the Commission first examines trading activity as a general 
measurement of the contract's size and potential importance. If the 
Commission finds that the contract in question meets a threshold of 
trading activity that would render it of potential importance, the 
Commission will then perform a statistical analysis to measure the 
effect that changes to the subject contract's prices potentially may 
have on prices for other contracts listed on an ECM or a DCM.
    The total number of transactions executed on ICE's electronic 
platform in the MXO contract was 437 in the second quarter of 2009, 
resulting in a daily average of 6.8 trades. During the same period, the 
MXO contract had a total trading volume of 61,688 contracts and an 
average daily trading volume of 963.9 contracts. Moreover, open 
interest as of June 30, 2009, was 826 contracts, which included trades 
executed on ICE's electronic trading platform, as well as trades 
executed off of ICE's electronic trading platform and then brought to 
ICE for clearing. In this regard, ICE does not differentiate between 
open interest created by a transaction executed on its trading platform 
and that created by a transaction executed off its trading 
platform.\30\
---------------------------------------------------------------------------

    \30\ 74 FR 51261 (October 6, 2009).
---------------------------------------------------------------------------

    In a subsequent filing dated March 24, 2010, ICE reported that 
total trading volume in the fourth quarter of 2009 was 19,216 contracts 
(or 296 contracts on a daily basis). In terms of number of 
transactions, 123 trades occurred in the fourth quarter of 2009 (1.9 
trades per day). As of December 31, 2009, open interest in the MXO 
contract was 2,528 contracts, which included trades executed on ICE's 
electronic trading platform, as well as trades executed off of ICE's 
electronic trading platform and then brought to ICE for clearing.
    The number of trades per day fell below minimum reporting level of 
five trades per day in the fourth quarters of 2009. Moreover, trading 
activity in the MXO contract, as characterized by total quarterly 
volume, indicates that the MXO contract experiences trading activity 
that is similar to that of minor futures markets.\31\ Thus, the MXO 
contract does not meet a threshold of trading activity that would 
render it of potential importance and no additional statistical 
analysis is warranted.\32\
---------------------------------------------------------------------------

    \31\ Staff has advised the Commission that in its experience, a 
thinly-traded contract is, generally, one that has a quarterly 
trading volume of 100,000 contracts or less. In this regard, in the 
third quarter of 2009, physical commodity futures contracts with 
trading volume of 100,000 contracts or fewer constituted less than 
one percent of total trading volume of all physical commodity 
futures contracts.
    \32\ In establishing guidance to illustrate how it will evaluate 
the various criteria, or combinations of criteria, when determining 
whether a contract is a SPDC, the Commission observed that 
``material liquidity itself would not be sufficient to make a 
determination that a contract is a [SPDC], * * * but combined with 
other factors it can serve as a guidepost indicating which contracts 
are functioning as [SPDCs].'' For the reasons discussed above, the 
Commission has found that the MXO contract does not meet the 
material price reference criterion. In light of this finding and the 
Commission's Guidance cited above, there is no need to evaluate 
further the material liquidity criteria since the Commission 
believes it is not useful as the sole basis for a SPDC 
determination.
---------------------------------------------------------------------------

i. Federal Register Comments
    ICE and WGCEF stated that the MXO contract lacks a sufficient 
number of trades to meet the material liquidity criterion. These two 
commenters, along with WPTF, FEIG and EEI argued that the MXO contract 
cannot have a material effect on other contracts, such as those listed 
for trading by NYMEX. The commenters pointed out that it is not 
possible for the MXO contract to affect a DCM contract because price 
linkage and the potential for arbitrage do not exist. The DCM contracts 
do not cash settle to the MXO contract's price. Moreover, the DCM 
contracts and the MXO contract are both cash settled based on physical 
transactions, which the contracts cannot influence.
    WGCEF and ICE noted that the Commission's Guidance had posited 
concepts of liquidity that generally assumed a fairly constant stream 
of prices throughout the trading day and noted that the relatively low 
number of trades per day in the MXO contract did not meet this standard 
of liquidity. The Commission observes that a continuous stream of 
prices would indeed be an indication of liquidity for certain markets 
but the Guidance also notes that ``quantifying the levels of immediacy 
and price concession that would define material liquidity may differ 
from one market or commodity to another.'' \33\
---------------------------------------------------------------------------

    \33\ Guidance, supra.
---------------------------------------------------------------------------

    ICE opined that the Commission ``seems to have adopted a five trade 
per day test for material liquidity.'' To the contrary, the Commission 
adopted a five trades-per-day threshold as a reporting requirement to 
enable it to ``independently be aware of ECM contracts that may develop 
into SPDCs''\34\ rather than solely relying upon an ECM on its own to 
identify any such potential SPDCs to the Commission. Thus, any contract 
that meets this threshold may be subject to scrutiny as a potential 
SPDC; however, the contract will not be found to be a SPDC merely 
because it met the reporting threshold.
---------------------------------------------------------------------------

    \34\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

    ICE proposed that the statistics provided by ICE were 
misinterpreted and misapplied by the Commission. In particular, ICE 
stated that the volume figures used in the Commission's analysis (cited 
above) ``include trades made in all months'' as well as in strips of 
contract months. ICE suggested that a more appropriate method of 
determining liquidity is to examine the activity in a single traded 
month of a given contract.\35\ It is the Commission's opinion that 
liquidity, as it pertains to the MXO contract, is typically a function 
of trading activity in particular lead days and, given sufficient 
liquidity

[[Page 38486]]

in such days, the ICE MXO contract itself would be considered liquid. 
In any event, in light of the fact that the Commission has found that 
the MXO contract does not meet the material price reference criterion, 
according to the Commission's Guidance, it would be unnecessary to 
evaluate whether the MXO contract meets the material liquidity 
criterion since it cannot be used alone for SPDC determination.
---------------------------------------------------------------------------

    \35\ In addition, ICE stated that the trades-per-day statistics 
that it provided to the Commission in its quarterly filing and which 
were cited in the Commission's October 6, 2009, Federal Register 
notice includes 2(h)(1) transactions, which were not completed on 
the electronic trading platform and should not be considered in the 
SPDC determination process. The Commission staff asked ICE to review 
the data it sent in its quarterly filings; ICE confirmed that the 
volume data it provided and which the Commission cited includes only 
transaction data executed on ICE's electronic trading platform. As 
noted above, supplemental data supplied by ICE confirmed that block 
trades are in addition to the trades that were conducted on the 
electronic platform; block trades comprise about 61 percent of all 
transactions in the MXO contract (fourth quarter of 2009). 
Commission acknowledges that the open interest information it 
provided in its October 6, 2009, Federal Register notice includes 
transactions made off the ICE platform. However, once open interest 
is created, there is no way for ICE to differentiate between ``on-
exchange'' versus ``off-exchange'' created positions, and all such 
positions are fungible with one another and may be offset in any way 
agreeable to the position holder regardless of how the position was 
initially created.
---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity
    For the reasons discussed above, the Commission finds that the MXO 
contract does not meet the material liquidity criterion.
3. Overall Conclusion Regarding the MXO Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the ICE MXO 
contract does not perform a significant price discovery function under 
the criteria established in section 2(h)(7) of the CEA. Specifically, 
the Commission has determined that the MXO contract does not meet the 
material price reference or material liquidity criteria at this time. 
Accordingly, the Commission is issuing the attached Order declaring 
that the MXO contract is not a SPDC.
    Issuance of this Order indicates that the Commission does not at 
this time regard ICE as a registered entity in connection with its MXO 
contract.\36\ Accordingly, with respect to its MXO contract, ICE is not 
required to comply with the obligations, requirements and timetables 
prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However, 
ICE must continue to comply with the applicable reporting requirements 
for ECMs.
---------------------------------------------------------------------------

    \36\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

V. Related Matters

a. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \37\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA. Certain provisions of Commission 
rule 36.3 impose new regulatory and reporting requirements on ECMs, 
resulting in information collection requirements within the meaning of 
the PRA. OMB previously has approved and assigned OMB control number 
3038-0060 to this collection of information.
---------------------------------------------------------------------------

    \37\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

b. Cost-Benefit Analysis

    Section 15(a) of the CEA\38\ requires the Commission to consider 
the costs and benefits of its actions before issuing an order under the 
Act. By its terms, section 15(a) does not require the Commission to 
quantify the costs and benefits of an order or to determine whether the 
benefits of the order outweigh its costs; rather, it requires that the 
Commission ``consider'' the costs and benefits of its actions. Section 
15(a) further specifies that the costs and benefits shall be evaluated 
in light of five broad areas of market and public concern: (1) 
Protection of market participants and the public; (2) efficiency, 
competitiveness and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission may in its discretion give 
greater weight to any one of the five enumerated areas and could in its 
discretion determine that, notwithstanding its costs, a particular 
order is necessary or appropriate to protect the public interest or to 
effectuate any of the provisions or accomplish any of the purposes of 
the Act.
---------------------------------------------------------------------------

    \38\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    When a futures contract begins to serve a significant price 
discovery function, that contract, and the ECM on which it is traded, 
warrants increased oversight to deter and prevent price manipulation or 
other disruptions to market integrity, both on the ECM itself and in 
any related futures contracts trading on DCMs. An Order finding that a 
particular contract is a SPDC triggers this increased oversight and 
imposes obligations on the ECM calculated to accomplish this goal. The 
increased oversight engendered by the issue of a SPDC Order increases 
transparency and helps to ensure fair competition among ECMs and DCMs 
trading similar products and competing for the same business. Moreover, 
the ECM on which the SPDC is traded must assume, with respect to that 
contract, all the responsibilities and obligations of a registered 
entity under the CEA and Commission regulations. Additionally, the ECM 
must comply with nine core principles established by section 2(h)(7) of 
the Act--including the obligation to establish position limits and/or 
accountability standards for the SPDC. Section 4(i) of the CEA 
authorizes the Commission to require reports for SPDCs listed on ECMs. 
These increased responsibilities, along with the CFTC's increased 
regulatory authority, subject the ECM's risk management practices to 
the Commission's supervision and oversight and generally enhance the 
financial integrity of the markets.
    The Commission has concluded that the MPD and MXO contracts, which 
are the subject of the attached Orders, are not SPDCs; accordingly, the 
Commission's Orders impose no additional costs and no additional 
statutorily or regulatory mandated responsibilities on the ECM.

c. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \39\ requires that 
agencies consider the impact of their rules on small businesses. The 
requirements of CEA section 2(h)(7) and the Part 36 rules affect ECMs. 
The Commission previously has determined that ECMs are not small 
entities for purposes of the RFA.\40\ Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) 
that these Orders, taken in connection with section 2(h)(7) of the Act 
and the Part 36 rules, will not have a significant impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \39\ 5 U.S.C. 601 et seq.
    \40\ 66 FR 42256, 42268 (Aug. 10, 2001).
---------------------------------------------------------------------------

VI. Orders

a. Order Relating to the Mid-C Financial Peak Daily Contract

    After considering the complete record in this matter, including the 
comment letters received in response to its request for comments, the 
Commission has determined to issue the following Order:
    The Commission, pursuant to its authority under section 2(h)(7) of 
the Act, hereby determines that the Mid-C Financial Peak Daily 
contract, traded on the IntercontinentalExchange, Inc., does not at 
this time satisfy the material price preference or material liquidity 
criteria for significant price discovery contracts. Consistent with 
this determination, the IntercontinentalExchange, Inc., is not 
considered a registered entity \41\ with respect to the Mid-C Financial 
Peak Daily contract and is not subject to the provisions of the 
Commodity Exchange Act applicable to registered entities. Further, the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4) governing core principle compliance by the 
IntercontinentalExchange, Inc., are not applicable to the Mid-C 
Financial Peak Daily contract with the issuance of this Order.
---------------------------------------------------------------------------

    \41\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------

    This Order is based on the representations made to the

[[Page 38487]]

Commission by the IntercontinentalExchange, Inc., dated July 27, 2009, 
and March 24, 2010, and other supporting material. Any material change 
or omissions in the facts and circumstances pursuant to which this 
order is granted might require the Commission to reconsider its current 
determination that the Mid-C Financial Peak Daily contract is not a 
significant price discovery contract. Additionally, to the extent that 
it continues to rely upon the exemption in Section 2(h)(3) of the Act, 
the IntercontinentalExchange, Inc., must continue to comply with all of 
the applicable requirements of Section 2(h)(3) and Commission 
Regulation 36.3.

b. Order Relating to the Mid-C Financial Off-Peak Daily Contract

    After considering the complete record in this matter, including the 
comment letters received in response to its request for comments, the 
Commission has determined to issue the following Order:
    The Commission, pursuant to its authority under section 2(h)(7) of 
the Act, hereby determines that the Mid-C Financial Off-Peak Daily 
contract, traded on the IntercontinentalExchange, Inc., does not at 
this time satisfy the material price reference or material liquidity 
criteria for significant price discovery contracts. Consistent with 
this determination, the IntercontinentalExchange, Inc., is not 
considered a registered entity \42\ with respect to the Mid-C Financial 
Off-Peak Daily contract and is not subject to the provisions of the 
Commodity Exchange Act applicable to registered entities. Further, the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4) governing core principle compliance by the 
IntercontinentalExchange, Inc., are not applicable to the Mid-C 
Financial Off-Peak Daily contract with the issuance of this Order.
---------------------------------------------------------------------------

    \42\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission 
by the IntercontinentalExchange, Inc., July 27, 2009, and March 24, 
2009, and other supporting material. Any material change or omissions 
in the facts and circumstances pursuant to which this order is granted 
might require the Commission to reconsider its current determination 
that the Mid-C Financial Off-Peak Daily contract is not a significant 
price discovery contract. Additionally, to the extent that it continues 
to rely upon the exemption in Section 2(h)(3) of the Act, the 
IntercontinentalExchange, Inc., must continue to comply with all of the 
applicable requirements of Section 2(h)(3) and Commission Regulation 
36.3.

    Issued in Washington, DC on June 25, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-16206 Filed 7-1-10; 8:45 am]
BILLING CODE 6351-01-P
```